Provisions in the Dodd-Frank Act will reduce the population of “accredited investors” able to access private equity investments.
Effective immediately upon enactment, section 413 of the bill excludes the value of an investor’s primary residence when determining individual net worth, effectively raising the threshold of personal wealth an individual must reach in order to gain “accredited” status.
An investor’s individual total net worth – or joint net worth in the case of a spouse – must exceed $1 million to qualify for “accredited investor” status under Regulation D of the 1933 Securities Act.
Regulation D allows “accredited investors” to invest in unregistered securities, such as private equity or hedge fund stakes. Investors with a high net worth are considered financially sophisticated and in less need of government oversight and protection.
By decreasing the available pool of “accredited investors”, section 413 will make it more difficult for small businesses to raise money from individual investors, including “angel rounds” of venture capital, according to a client alert from international law firm Dechert.
The bill further directs the US Securities and Exchange Commission to increase the assets and income thresholds for accredited investors to account for inflation, as figures were last determined nearly thirty years ago. Following the revision, the SEC will subsequently be required to adjust figures at least once every five years to account for future inflation.
If, for example, the SEC uses 1982 as a base year for inflation, the $1 million figure would, based on 2009 calculations, rise to $2.2 million, according to Dechert.
“Issuers should immediately revise their offering documents to reflect the change to the accredited investor standard and, if in the process of an offering, ensure that investors who buy securities on or after enactment of the Act meet the new standard,” according to Dechert.